How Apple would solve the debt crisis

I’ve been covering Wall Street and corporate America for going on two decades, and if there’s anything I’ve learned it’s that there are really only two kinds of companies: those growing and those shrinking.

The U.S. government today has officially become the latter.

The difference between a growing business like Apple Inc. (AAPL, Trade ) and a shrinking one such as Eastman Kodak (EK, Trade ) has less to do with spending and revenue and than with psychology. Growing companies go through tough times. They adapt, and they’re poised to strike when conditions are right. They don’t stop innovating.

Defeated companies may be producing steady profits. But they lose their entrepreneurial spirit. They stop looking at the future. They get intimidated. They quit fighting. They look for a sale. They try to buy growth. They play not to lose — and end up losing anyway.

Which of those does Washington sound like?

So, what would happen if Apple had to tackle the debt crisis? First, it would eliminate spending that’s not working. Then it would make a commitment to spend if necessary. Third, it would look for ideas to spend on. Finally, it would call customers’ bluff. How much are you willing to pay for what the government gives you?

Ultimately, what’s happened to our government, lawmakers, elected officials and ourselves is that we’ve have taken on a mind-set of defeat. It doesn’t seem to matter that the business model — taxing for revenue, spending for growth — isn’t broken. After all, it’s working in Germany, Canada, India and China.

We’ve given up on the model because of our debt situation. It’s a problem, and a pressing one. A default or lower credit rating would cause further damage to our credit picture.

But there are really two ways to handle it. We could take a balanced approach of reining in spending and increasing revenue (cutting costs, raising taxes), or we could simply cut, slashing incomes (Medicare, Social Security, the military). These drastic cuts, which will balance annual budgets, are in effect a surrender.

They are based on the belief that revenues (taxes) won’t rise through increased business activity, and that taxes can’t be raised without scaring the private enterprise. In business terms, management is convinced sales won’t be enough to pay the bills and that raising prices will drive away customers.

Again, this is more about psychology than profit and loss. Let’s take a look at three winners in the corporate world:

On the flip side are plenty of losers. Citigroup Inc. (C, Trade ) tried to buy its way to greatness. Microsoft just paid a stunning $7 billion for Skype. General Motors (GM, Trade ) management failed to take the difficult steps that an eventual bailout and bankruptcy restructuring thrust upon it. None of these companies took significant risks. They cut staff and spending. They cooked the books with deals. They played — or are playing — not to lose.

You can see the difference. Companies with managers who believe in what they offer aren’t worried about balanced budgets. And it’s not just big business. Small businesses owners are told by the Small Business Administration to spend money when it saves you time. Hire a janitor, so you can focus on the business instead of mopping the floors.

And the SBA by its existence acknowledges the fact that borrowing is a necessary part of running a business.

That’s why, even with all the mistakes the government makes, it still doesn’t make sense for it to be run as if the country has been defeated. It’s interesting to note that our deficit of $14 trillion is the biggest since World War II. In 1945 the deficit was 120% of gross domestic product, compared with about 97% today. So how did the nation respond? By spending on infrastructure and raising taxes. We built housing and roads, and we invested. Unemployment fell from 3.9% in 1946 to 2.9% in 1953.

By the time Harry Truman left office in 1953, the deficit was 71% of GDP. When Dwight Eisenhower left office, it was 55%. Bill Clinton raised taxes in 1993, and the U.S. saw the biggest peace-time expansion since the 1950s. In both eras, the key was that the government gave people and business what they wanted.

Those were different times, of course. But the point remains: It takes a lot of guts to raise revenues. It takes spending to help the private sector. If every company aimed for a balanced budget, the majority would be out of business.

Wall Street, I’ve found, was built on a simple idea: Companies need financing to grow. Governments need it, too. But governments also have a distinct advantage: They have the power to force the customer to pay, and they have it in perpetuity.

But to focus time and energy on doing nothing but cutting to make ends meet? That’s what a defeated company does. And once you’re convinced you’re defeated, it’s over. You will be making film in an age of digital cameras.

Sure, you may survive, but you’ll never thrive.

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This entry was posted on 03/08/2011 at 12:41 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed.
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